Competition and the Nanny State

By Bob Bruner-

I am on the way to Asia. The first stop was Los Angeles where I spent the evening at a reception with Darden alumni. A particularly insistent alumnus cornered me for 45 minutes with a bone to pick. He thought that the provocative new book (Redefining Health Care) by Darden’s Elizabeth Teisberg and Harvard’s Michael Porter reached the wrong conclusion. And he handed me a five page single-spaced letter (!) laying out his arguments. The gist of his complaint is that Porter and Teisberg do not define the field of health care broadly enough to include practitioners of alternative medicine, such as naturopaths, homeopathic physicians, acupuncturists, chiropractors, etc. Now, alternative medicine is something I know virtually nothing about and this guy is standing between me and the food, beverages, and other alumni present of whom I am the supposed host. I got the sense that this alumnus wanted me to ask Elizabeth to change her mind. On matters of research, such a request is verboten—academic freedom means that you can present alternative arguments and evidence, but you must not compel a person to change one’s thinking. So pre-empting his pitch, I excused myself to attend to the other guests but promised to read his letter.

The letter is well-written and reasoned. Our alumnus writes, “the AMA-Big Pharma oligopoly will never have an incentive to worry about providing the best possible value to their customers. I believe that the real root cause of the health crisis we now face includes the fact that the AMA-Big Pharma oligopoly has constructed barriers to entry that keep real competition out of health care.” He points to licensing practices for health care providers and government regulation that favors the oligopoly. This reminds me of a passage in Adam Smith’s Wealth of Nations:

”The proposal of any new law or regulation of commerce which comes from (dealers . . . in any particular branch of trade or manufactures) . . . ought never to be adopted till after having been . . . examined . . . with the most suspicious attention. It comes from an order of men . . . who have generally an interest to deceive and even to oppress the public.”

I take a more benign view of the medical profession than to suppose deceit and oppression. Still, there is ample evidence to suggest that self-regulation of a field by a professional group dampens competition. The writer even gives a quotation from Thomas Jefferson:

“I know of no safe depository of the ultimate powers of the society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take if from them, but to inform their discretion.”

Like most business people, I root for practices that give consumers more choice—to do so is to be customer-oriented. Consumers are better off and businesses get better feedback on their products and services. Prices in such an environment convey a great deal of information. On balance, the welfare of society is higher. This would favor Porter and Teisberg, and perhaps even our alumnus.

But then I recall a brief conversation with a world-famous surgeon on the staff of the UVA Medical School. In addition to his professional qualifications in medicine, he is an active and successful entrepreneur. I supposed that given his business experience he would lean in favor of Porter/Teisberg and perhaps our alumnus. But no. He argues that the medical system and the considerations in many medical decisions are too complex. Can the consumer be expected to process all the complexity as effectively as a medical professional? The doctor points out that the average IQ score in the population is 100—at best, half the population might be up to the challenge of processing the complexity well. He argues that the role of the medical professional is to stand up for those who don’t process this complexity very well.

My flight over the Pacific left me pondering the arguments of the homeopath and the surgeon. Businesses flourish in freedom. Former British Prime Minister, Margaret Thatcher, railed against the choking nonsense of the “nanny state” that intervened too deeply in the decisions of the individual. Yet, some degree of intervention is convenient. I’m glad that someone inspects the meat I eat and the operating condition of the airplanes in which I fly. Such inspections require expertise that I don’t have. And the intervention of the state frees me up to spend my time in ways that can make a broader difference.

When it comes to health care, I will watch the policy debate spawned by Porter and Teisberg with great interest. The intervention of governments and professional guilds in the functioning of markets is a grave concern, never to be undertaken lightly, and only when the general welfare demands. With lives and health at stake, free experimentation is not appropriate. The outcome will probably hinge on the amassing of evidence firmly supporting one side or the other. Here’s where the research done in medical schools, departments of science, and yes, even business schools, can make a difference.

Bob Bruner
Dean, Darden School of Business

Posted by Robert Bruner at 07/18/2006 05:16:36 AM